EU Commissioner Says Austerity Focus Feeding Recession

ByIan Talley

An over-reliance on slimming government budgets is feeding the euro zone’s recession, European Union Labor Commissioner Laszlo Andor warned in an interview.

“We need a smarter fiscal consolidation than before, which means that the wrongly calibrated fiscal consolidation measures probably contributed to the deceleration of growth and this second dip,” the EU Commissioner for Employment, Social Affairs and Inclusion said after meetings with the Obama administration, International Monetary Fund and World Bank officials this week.

Although the job of labor commissioner isn’t one of the heavyweight roles within the commission, Andor’s comments are one of the first times a top European Union official has publicly suggested that the broad focus on austerity has been harmful to the European economy.

The “timing, composition and distribution” of budget belt-tightening “makes a difference,” Andor said.

Washington and the IMF have been pushing Europe to take greater care of how it reduces government debt burdens, fearing that too much consolidation too fast would undermine desperately needed growth in the euro zone.

“Even if there’s a consensus about consolidation as a concept, there is no consensus about how exactly it is best done,” the commissioner said. Although countries such as Italy, Spain, Ireland and Portugal have made healthy cuts to their budgets, other members such as Germany, Sweden and Austria have more room to encourage growth in the near term, he said.

The IMF expects euro-zone output to contract 0.5% this year, but warns inaction by European leaders could cause the economy to shrink by as much as 4% on average over the next couple of years.

Andor said he expects a “modest increase” in the average unemployment rate across the region in the first half of the year, “but I wouldn’t say that it will approach 11% on the EU level. That would be a nightmare scenario.”

The EU is scheduled to release new economic forecasts on Feb. 23. The U.S. unemployment rate has fallen in recent years, dropping to 8.3% last month from a peak of 10% at the height of the financial crisis.

The commissioner said he spent much of his time in Washington studying how the U.S. was able to spur demand and cut persistently high unemployment levels. The U.S. government and the Federal Reserve have greater flexibility than the E.U. or the European Central Bank, a lesson he said that has application in Europe.

Andor said potentially expanding the ECB’s role in the euro zone, although the bank’s decision, is a worthwhile debate.

“There has been a very legitimate discussion about the mission, the mandate of the ECB,” he said. Including strengthening the fiscal pact between euro members, Andor said “we have to develop these common instruments in a robust way in order to respond to the crisis and sustain the euro as a project that unifies Europe and not as a project that divides Europe,” he said.

The commissioner said it’s “very important as a general rule of thumb…we review all the possibilities.” Encouraging growth, particularly in the southern euro-zone countries where the debt crisis is worst, “probably doesn’t happen without some further innovation in the financial architecture.”

The comments from the senior EU official come as Brussels is encouraging the ECB to forfeit profits it could make on Greek government bond holdings as part of a debt deal for Athens.

Separately, Andor gave an indication of the potential cost of new employment measures agreed at the last euro-zone summit, saying if members prioritize the new policies, they could tap up to half of the European Social Fund. He estimated around €30 billion in the ESF remains uncommitted, though other officials suggest the figure is closer to €22 billion.

“It has to supplemented, of course, by other resources as well. It’s being worked out now between my office, the state representatives and social partners,” the commissioner said.

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